College savings programs, or 529 plans, are the federal government's way of urging any and every family to save for college by providing valuable tax breaks.

Employing a 529 to save for college used to be a no-brainer. But with the passage of last year's major tax act, reducing taxes on capital gains, dividends and income taxes, the case for the savings plans is less compelling, say some financial advisers.

In some situations, says Deborah Fox, founder of Fox College Funding in San Diego, "We can show people they would keep more money saving outside the 529."

Starting last year, dividend rates for taxable accounts have been reduced from ordinary income tax rates to 15% for those in higher income brackets and 5% for those in lower income brackets.

Taxes on gains from the sale of stock has been cut from 20% to 15% for higher income taxpayers and from 10% to 5% for lower income taxpayers. And the top four income tax brackets have shrunk by at least 2 percentage points, such as from 30% to 28%. (See related story and charts.)

Parents can give appreciated stock and securities to college-bound students, have them collect dividends at the lower 5% rate, or sell at the 5% capital gains rates and draw interest on the proceeds at the lower income tax rates until they pay educational expenses. Thus, the overall family's tax bill is lower.

In the seven years since the plans were created, the federal and state governments have refined and improved the 529, which, like the 401(k), is named for its section in the tax code.

Families who set up 529s can, however, run into some unexpected complications, says Fox.

It's possible, she says, that once students begin withdrawing funds from their college savings accounts, they could actually owe federal taxes on a portion of their supposedly tax-free 529s earnings -- if they receive scholarships or tuition discounts and/or use the IRS tax credits available to the middle class. (Families are eligible for either the Hope or the lifetime learning credit of up to $2,000 toward qualified educational expenses if their modified adjusted gross incomes fall between $41,000 and $51,000 for single filers and heads of households, and between $83,000 and $103,000 if married and filing jointly.)

There's no doubt that college savings plans offer considerable tax benefits -- non-deductible contributions can grow and be withdrawn by students for qualified education expenses free from federal taxes -- compared to taxable investments.

Accumulating sums sizable enough for college expenses, means most families need to begin contributing to 529s while their children are infants, long before they demonstrate any interest in higher education. The 529 accounts can be shifted to other family members if the chosen beneficiary opts not to attend college.

But if the funds withdrawn are not used for college, the tax benefits evaporate: The earnings are taxable to the recipient and subject to a 10% federal tax penalty, and possibly state penalties as well.

College savings plans were created by individual states and are managed by state treasurers or outside professional investment advisers, usually large mutual fund companies like Vanguard or TIAA-CREF. Rules vary from state to state, but most states allow investors from other states to participate, which has generated both competition and confusion for consumers.

While contributions aren't deductible for federal taxes, residents in certain states such as New York, Maryland and Ohio may deduct their contributions in those states.

It pays to contribute early because earnings grow and compound the amount of tax deferred.

Account contributions can be placed in a variety of investments, from aggressive stock mutual funds to conservative fixed income. Families can invest in a variety of different state funds and may switch from one state plan to another once a year.

When a 529 account is created, it is considered the asset of the donor, such as a parent or grandparent, and not the prospective college student. In fact, the fund can be used for different qualified members of the same family, not just for the original beneficiary.

The great advantage to 529 plans comes when students withdraw the money to pay for what the IRS considers qualified educational expenses, such as tuition, fees, books, transportation and room and board. Earnings from the plan are free of federal taxes, and with some plans, free of state taxes as well.

While 529 funds accumulate for the benefit of the child, or student, they are under the control of the parents until withdrawn, unlike older, once popular forms of college savings known as UGMA (Uniform Gifts to Minor Act) and UTMA (Uniform Transfers to Minors Act) gift accounts, which the child controls at either age 18 or 21.

Another 529 plus: When colleges go to figure financial aid awards, the money is counted as belonging to the parents, not the students. Standard aid formulas require students to contribute as much as 35% of their investment assets toward college expenses each year, while parents are assessed only up to 5.6%.

The IRS rules allow families to jump-start 529 plans with big contributions. Anyone, a parent or grandparent, can put $11,000 into a child's 529 account each year.

Beyond that, however, the law permits an exception to the $11,000 annual gift rule: An individual can contribute as much as five years worth of gifts, or $55,000, to a 529 account in one year without triggering estate or gift taxes -- as long as the individual waits five years to begin giving again to the same beneficiary.

Starting big and early is the way to make college investments grow. But making a major commitment to a 529 plan for 18 years can be difficult.

Dennis Stein, a Rochester, N.Y., CPA, says, "Even with the 529 plans, the reality is when couples are young, they don't have the excess cash flow to fully fund those." They accumulate more assets in their 40s and 50s, through career advancements, stock options and inheritance.

Many parents are surprised to learn how much they need to save with a 529 -- even for a state college and even if they start at the child's birth.

For instance, Lisa Larson Adams, a San Diego mother of a five-month-old son, recently learned that to pay for four years at a California public college, or the equivalent of $50,000 in today's dollars, she would need to start now contributing $313 a month, or $3,756 a year, earning a 7% annual rate of return.

While assets in 529 plans are growing apace, a report issued last year by Cerulli Associates of Boston says that in 2002 only 4.3% of children under 18 had an account, with an average balance of $6,457.

Interest in 529 plans is high, but many families are intimidated by the tax complexities and the mind-boggling array of plan choices. For more information, visit collegesavings.org , operated by an association of state treasurers, and savingforcollege.com , run by CPA Joseph Hurley, a 529 specialist and advocate who rates the many state plans.